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Contract law

Contract
law -- Unfair terms

It
is commonplace for a party drawing up a contract to seek to minimise the amount
of liability that may be incurred in the performance of that contract.
Contractual clauses that have this effect are usually called `exclusion clauses'
or `limitation clauses'. There is a whole academic debate about the doctrinal
significance of these clauses in the law of contract. This debate centres on
whether they are `defensive' or `obligation defining' in nature. This is of
little practical significance, because the courts and, more recently, the
legislature have come down in favour of the `defensive' interpretation.
Arguably, this `defensive' view is more prevalent in the UK than the European Community (EC), and this may account for some of the problems that are
described in this article. Exclusion clauses often attempt to exclude or limit
liability for losses arising out of breach of contract, or for
extra-contractual liabilities. Extra-contractual liabilities will often include
losses for misrepresentation, or negligence in performing the contract.
In practice, most peoples' exposure to the sharp end of an exclusion clause is
as a consumer in a sales or services transaction. For example, may of us who
use public transport have experienced entering into contracts in which the
service provider excludes liability for being unable to run a tolerably useful
service. Generally we don't find this out until it is too late, and even if we
found out there wouldn't be much we could do. In a given region, the choice of
transport providers is limited.
Of course, from a business perspective this limitation of liability makes good
sense. It could even be argued that it makes sense for the consumer as well. If
the service provider has to pay compensation for all the losses that arise from
running a poor service, that cost will simply be passed on to the consumer.
Whatever the merits of this argument, there are clearly exclusions that
perpetuate an injustice so great that they can't be tolerated in a decent society.
The archetypal case of this sort is Thompson
v London Midland and Scottish Railway (1930). In this case, an
elderly, illiterate woman bought a railway ticket which contained a reference
to the railway company's standard terms and conditions. These included - on
page 552 - a statement that the railway would not accept liability for
negligence. When the train pulled up at the station, it turned out that it was
too long for the platform, and there was a long drop from the end carriage to
the ground. As a result of this mis-operation, the unfortunate Mrs Thompson
fell and broke her leg. When she sued the railway in negligence, the exclusion
clause was upheld, to the amazement of almost everybody. Mrs Thompson was an
adult of full capacity, despite being unable to read, and had the notional
freedom to either enter the contact or refrain. Although the courts had begun
to develop common-law principles by which exclusion clauses could be brought
under control, cases like Thompson
made it clear that some form of statutory control was desirable.

The
problem with allowing statute law to get to work on exclusion clauses is that
this conflicts with a long-established principle of English law. This principle
is that of `freedom of contract'; it says that adults of full capacity who make
contracts with each other should expect to abide by them, including those terms
that are unwelcome. The moral is: if you don't like the small print, don't sign
on the dotted line. So when the Unfair Contract Terms Act (1977) (`UCTA') was
drafted, it tried to balance freedom of contract against the need to prevent
egregious injustice. As a result, UCTA deals with a limited set of highly
specialised types of exclusion (table 1). For example, it strikes out any
attempt disclaim liability for death or injury, and this would probably have
allowed Mrs Thompson to win her case against the LMS Railway. Attempts to
disclaim liability for losses caused by negligence will be struck out if they
don't pass the test of `reasonableness' (of which, more later). UTCA also
restricts the ability to exclude liability for selling poor-quality, defective
goods, or goods that the seller doesn't have a right to sell (because, for
example, they actually belong to someone else at the time). Finally, it makes
attempts to exclude liability for misrepresentation subject to a test of
reasonableness. Many of these types of exclusion are treated differently
depending on whether the party affected is a business or is `dealing as
consumer'. As a result (and as should be clear from table 1) the provisions of
UCTA are complex, and a number of key terms are left undefined.
For example, the definition of `consumer' leaves a lot to the interpretation of
the courts. Notoriously, in the case of R
and B Customs Brokers v UDT the Court of Appeal held that a family
firm that bought a car, partly for work and partly for social use, was a
consumer for the purposes of UCTA. To be fair, it isn't necessarily obvious
what a consumer is, in a number of borderline situations.
The next problem is that of `reasonableness'. UCTA does not define what it
means to be reasonable, but it does give some guidance. The courts are to have
regard for, among other things, the relative bargaining positions of the
parties, whether the contract is negotiated or in standard form, and whether
the party affected by the exclusion clause was offered an incentive to contract
on particular terms. This approach allows the courts a lot of flexibility, and
some surprisingly draconian exclusion clauses have been upheld. For example, in
SAM Business Systems v
Hedley and Co a software supplier was allowed to rely on an
exclusion clause that allowed it to supply a thoroughly inadequate product. The
Technology and Construction Court decided that the parties were of roughly equal
bargaining power, and the purchasers could have attempted to negotiate better
terms. The court also recognised that such clauses are ubiquitous in the
computing industry. Had the purchaser been a consumer, the reasonableness test
would not have applied; the exclusion clause would simply have been struck out,
because it attempted to disclaim liability for supplying goods that are not
suitable for their purpose.
The other problem with UCTA, which results from the delicate balancing act it
has to perform, is that it only deals with exclusion clauses, and these are
only one type of onerous contractual clause that causes problems. Consider the
infamous case of Interfoto
v Stiletto (1987). Here an advertising agency asked a photographic
service to produce photographs for a presentation. The photographic service
sent 47 transparencies to the agency for inspection, along with a contractual
letter which had in its small print the statement that transparencies were to
be returned within 14 days. If they were not, the service would levy a charge
of £5 per negative per day. The agency forgot about the transparencies for a
couple of weeks, and were rather surprised to receive a bill for £3,783. The
Court of Appeal held that a term as onerous as this would have to be made very
clear if it were to be enforced, and the claimants had not done anything to
bring it to the defendant's attention. As a result, the claim failed. This
process of striking out a clause on the grounds of incomplete `incorporation'
was one of the ways that the courts had sought to control exclusion clauses in
the pre-UCTA days. While the Interfoto
case showed that the courts were prepared to go through the whole process again
for other types of onerous clause, this was hardly satisfactory. from
coursewrok work info

As
it turned out, the EC had also been considering legislation to control onerous
clauses, and a Directive was issued to that effect in 1993. This became the
Unfair Terms in Consumer Contracts Regulations (1994) (`UTCCR'; later
superseded by the 1999 version). There were, and are, a number of important
differences between UCTA and UTCCR (summarised in table 2).
First, UTCCR deals only with contracts between businesses and consumers. For
UTCCR purposes, a consumer is any `natural person' acting outside the course of
his business. The phrase `natural person' implies that only individuals, not
businesses, may benefit from UTCCR. Thus the claimants in R and B Customs Brokers
(above) would be excluded, unless they claimed as private individuals. There
is, therefore, a difference between a `consumer' for UCTA purposes and for
UTCCR purposes. There would, no doubt, be a large number of cases in which
whether a person was a `consumer' or not would be decided the same way for both
UCTA and UTCCR; but there are cases where it wouldn't. For example, in UCTA a
person who buys at auction is, buy definition, not a consumer. However, there
is nothing in UTCCR that prevents a private individual buying at auction being
a consumer.
Second, UTCCR deals not only with exclusion clauses, but any `unfair' term. An
unfair term is any that imbalances rights and obligations significantly to the
detriment of the consumer. Like UCTA's notion of `reasonableness', `unfair' is
not defined, but there is guidance. For example, a clause might be unfair if it
allows the business to terminate the contract at its discretion, without
extending the same freedom to the consumer. Another example is a term allowing
the business to vary the contract without the consent of the consumer. It should
be clear that this notion of `unfairness' goes much further than UCTA's
`unreasonableness'. UCTA does not prevent a contract containing terms that
allow one party to vary its obligations, for example. However, UTCCR does
nothing to control onerous terms in non-consumer contracts. This means that the
defendants in the Interfoto
case would not be able to rely on UTCCR to escape their huge bill. It still
falls to the courts to handle situations like this on a case-by-case basis.
Third, UTCCR applies only to terms that have not been individually negotiated
between the parties. A term that has been influenced by the consumer is, by
definition, fair. Under UCTA, the test of reasonableness does allow for
consideration of whether the term was negotiated, but this is only advisory. A
negotiated term can still be deemed unreasonable.
Fourth the explanation of `unfairness' in UTCCR includes the phrase `contrary
to the requirements of good faith'. This seems to imply that the draughtsman of
a consumer contract has an obligation to contract in good faith, a relatively
alien idea in English law. Of course, UTCCR comes from the EC, and the idea of
contractual good faith is less unusual in other parts of Europe. There is
little case law which considers what `good faith' is in terms of consumer
contracts, so it may be that this phrase adds little to our understanding of
unfairness.

So,
currently we have two major pieces of legislation that overlap, but not
completely. Certain contractual arrangements are caught by both UCTA and UTCCR
and handled the same. For example, both UCTA (certainly) and UTCCR (advisedly)
would strike out a clause that attempted to disclaim liability for death or
injury. Situations like this should not cause any problems. Then there are
contractual arrangements that are handled by one piece of legislation and not
the other. For example, UTCCR deals with onerous terms in consumer contracts,
while these are beyond the remit of UCTA. Some contractual arrangements are
within the scope of both UCTA and UTCCR, but are subject to different tests.
For example, consider a term in a contract for supply of goods and services,
that tried to disclaim liability for faulty goods where the manufacturers were
to blame for the faults. Such a term would be void under UCTA if the purchaser
were a consumer, void unless reasonable under UCTA if the purchaser were a
business, void if `unfair' under UTCCR if the purchaser is a consumer, and
unaffected by UTCCR if the purchaser is a business. Since `unfair' is not the
same as `unreasonable', these complications are even more opaque. Finally, some
contractual injustices that cry out for redress are handled neither by UCTA nor
UTCCR. For example, a large, powerful business can still impose onerous terms
on a small business, and there is no statutory protection against these terms.
Apart from the problems of determining which types of term in which types of
contract are caught by which piece of legislation, there is the additional
problem that UTCCR goes beyond striking out unfair terms: it also imposes
obligations on the contract draughtsman, such as to write in clear language.
This may be no bad thing, but there is no corresponding rule for business
contracts.

In
summary, the law on statutory control of exclusion clauses is in a lamentable
state. The Law Commission has recently proposed the introduction of new
legislation to unify UCTA and UTCCR. Among the proposed changes are plans to
make the same rules apply to both businesses and consumers, and to replace the
current `reasonableness' and `fairness' tests with a common test of `fair and
reasonable' that would apply to all kinds of contract. from
coursewrok work info

Any other passage of goods where the goods are of unsatisfactory
quality or do not match their sample or description

void (UCTA s.7(2))

acceptable if reasonable (UCTA s.7(2))

Breach of standard-form contract

acceptable if reasonable (UCTA s.3)

not affected

Misrepresentation

s.3 Misrepresentation Act 1967

acceptable if reasonable (UCTA s.8(1))

acceptable if reasonable (UCTA s.8(1))

Table 1: summary of the effect of UCTA on exclusion of liability

UCTA 1977

UTCCR 1999

Who can benefit?

Anyone, but consumers get greater protection

Only consumers

Definition of `consumer'

a person who ``neither makes the contract in the course of a
business nor holds himself out as doing so; and the other party does make the
contract in the course of a business ''

``any natural person who, in contracts covered by these
Regulations, is acting for purposes which are outside his trade, business or
profession''

Scope of contractual terms affected

Exclusion and limitation clauses only

All terms that are not negotiated

Identification of affected terms

Certain terms are entirely void. Others must satisfy a test of
`reasonableness'. Reasonableness is not defined, but there are guidelines

All `unfair' terms. Terms are unfair if they significantly
imbalance rights and responsibilities against the consumer

Effect on draughting

None

Impose an obligation to write standard-form contracts in terms
intelligible to the consumer

Introduce an element of `good faith' in contractual statements

No

Yes (see r.5(1))

Table 2: brief comparison between UCTA and UTCCR

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